The light at the end of the tunnel is approaching for Hong Kong’s retail sectors, but with huge heterogeneity

Hong Kong’s retail-related sector may start to see the light at the end of the tunnel. In recent months, consumer sentiment has improved due to relaxed domestic mobility restriction and spending vouchers. The rebound in sales has also improved employment data and real estate prices. In this note, we analyze the pace of recovery in Hong Kong’s retail-related sectors comparing to the levels before the pandemic and social unrest, followed by the future challenges.

With limited domestic Covid cases, mobility for retail and recreation in Hong Kong has been improving since March 2021. This has led to a significant rebound in food services and accommodation, which are now close to pre-pandemic levels. Retail sales are also spruced up by resilient domestic demand, but the recovery is slower and less pronounced than for other sectors. Still, the improvement is far from making up lost ground since social unrest started in Hong Kong. Food services, retail sales and accommodation only recovered to 82%, 75% and 55% of the levels reached at the end of 2018.

In the labour market, employers have responded by recruiting more workers. Unemployment rate has declined from the peak of 7.2% in February 2021 to 4.5% in September 2021. The improvement is driven by the retail-related sectors, as the jobless rate of retail, food services and accommodation moved from 11.3% to 7.2%. The downside risk, though, may come after Christmas and Lunar New Year if domestic demand hits a ceiling without external visitors. For example, Mainland China forms 77% of total revenue in Hong Kong listed jewelry sellers in 2020, up from 47% in 2015. In other words, meaningful progress in border reopening seems key to keep such improved outlook.

Retail properties have also regained momentum with price and rent rebounding to 96% and 93% of the level in 2018. However, large transactions are scarce, and the vacancy rate remains elevated at 11.1% in Q3 2021, rising from 9.4% in Q2 2019. Still, retail properties perform better than offices, which has seen the vacancy rate surging from 5.1% in Q2 2019 to 10.5% in Q3 2021. But the latest development is not enough to significantly raise rental demand for shops.

Going forward, Hong Kong’s retail-related sectors will face three challenges. First, regional competition may reduce the attractiveness of Hong Kong, such as the Hainan Free Trade Port and other cities in the Greater Bay Area. Second, lower import taxes in Mainland China may reduce the incentives in traveling to Hong Kong for shopping. More generally, if cross-border mobility restriction with Mainland China is to remain, it seems hard to keep a positive momentum on retail sectors. Third, the emergence of e-commerce platform may reduce the need for brick-and-mortar floor space. The ultimate question is how Hong Kong will position itself as important hub of Asian tourism hub, but?the topic does not seem to be well covered in the latest policy address.

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